A share is a ________ on the value of assets of the firm with an exercise price equal to the ________.
A)put option, market value of equity
B)call option, face value of debt outstanding
C)call option, market value of equity
D)put option, face value of debt outstanding

Question

Quizplus · Accepted Answer

A share can be viewed as a call option on the firm's assets, with the exercise price being the face value of the debt outstanding. This is because shareholders have the right, but not the obligation, to "buy" the firm from the bondholders by paying off the debt, similar to how a call option gives the holder the right to buy an asset at a specified price.

A Share Is a ________ on the Value of Assets